My understanding of the accounting issue is this:
1. Under the old rule: Some of OTTI losses were included in net income and some in OCI (Comprehensive Income).
2. Under the new rule: All of OTTI losses for most of non-Agency (AA and below) is included in net income.
3. However (and this is the important KEY point): The REIT taxable income (that is the figure used to calculate our dividend payment--(CIM has to pay 90 per cent of the REIT taxable income figure)) is not affected by the movement of OTTI losses into net income from comprehensive income. CIM always calculated OTTI losses each quarter; however, now some (most) of it must be moved around from OCI to net income. It does not change the underlying figures that are used to calculate the dividend payment.
Also recon - to your point about the purchase price of CIM's assets (~50% of par). I did just take a second look at the Q2 10Q.
On page 11 there is a nice table which summarizes the par value, unamortized premium, unamortized discount and unrealized gains and losses of the various asset classes in CIM's portfolio.
The vast majority of the unamorized discount (total $2.91B) is in the subordinated RMBS ($2.56B). So while it is true that the purchased assets at 50% of par this discount is concentrated in the below B or non rated portions of the portfilio.
Even at the substantial discount, however, the subordinated assets are still underwater by about $261M on a net basis.
I hope you are right and that the delay is just an accounting change, and that there will be no impairment which will impact either yield or book value. If that is the case, then CIM is a screaming buy.
I do wish, however, I understood why they chose to sell of the AAA and super senior re remic tranches only to keep the back end trances on the balance sheet... To me that strategy made no sense at all. Any explainations are welcome.
Thats cool - I would be interested in your views.
It is true that if you buy assets at 50% of par and you get a better recovery rate than that you have done well.
If those bonds are subordinated to other tranches in re-remic structures then that is a different matter, and you could get zero.
Anyway - I just listened to the IRV call. They reported that their senior re-remic book was essentially flat during the quarter, but they reported a 15% decline in book value.
IVR carries much more leverage than CIM on both their agency and non agency RMBS. It would seem to me that all else equal CIM should post a very modest change in book value. I do think, however, that IVR has a superior credit quality in their portfolio.
We will see when CIM reports....
Lets hope that this is a major buying opportunity for CIM.
Recon and Long thanks for the clarifications and I get your points.
1)Don't confuse taxable income with EBT.
2)Losses due to impairment of the carrying value of "held to maturity" assets will not impact taxable income until those losses are realized.
For the record I don't own CIM currently, but I do own NLY. I swaped out of CIM and into NLY when the Q1 10Q stated that ~80% of CIM's consolidated non agency RMBS book was in B and unrated assets. This was a substantial deterioration of credit quality from the Dec 31 balance sheet which was the result of sales of AAA securities (as I recall).
Let me ask you guys a question if you don't mind - do you think that I am correct in my view that this high concentration of below B and unrated assets is the direct result of the RE REMIC deals that CIM executed previously.
I base this on the fact that the Q2 balance sheet shows $4.70B of $10.09B (46%) of total assets in Senior and Subordinated non agency RMBS which held in VIEs (which are similar to SPVs from what I understand). This reminds me of several 2008 bank melt downs.
I wonder if CIM's non agency book is really composed of the back end tranches generated by CIM's previous re-remic deals?
As I said, I don't own CIM currently, but if this theory is true I think it very negativly reflects on the credibility of both FIDAC and NLY.
If it is not true, and CIM's non agency book is composed of higher quality assets than it appears - then this current CIM prices represent a great opportunity.
What do you guys think - is CIM's non agency book primarily composed of back end tranches of RE REMIC deals or am I way off base?
It would not affect taxable income (hence dividends) until it is a realized loss. Unrealized losses are not put into the taxable income fiqure. Sort of like when you have an unrealized loss in your stock portfolio. It is not realized until you sell (or in the case of equities--if the company goes completely bankrupt and the stock is terminated). Obviously, you do not want high OTTI. HOWEVER, the fact that some OTTI for some quarters has to moved to net income from comprehensive income is a non-issue. It does not change the OTTI amount. The dividend does not change from OTTI being put into net rather than OCI because it is not used in calculating the figure used to determine deividends.
The ACCOUNTING issue is whether
an investment exists (valuations escape earnings but are charged to stockholders' equity)
a trading security exists (previously valuations charged to earnings)
Under either approach stockholders' equity is the same (which incidentally is very strong).
Whether an earnings charge or a stockholders' equity charge arises from the above there is NO EFFECT on TAXABLE EARNINGS (basis for dividend distribution).
Once again, excellent post. Thanks
I understand what you are saying - I think. However, I find it difficult to understand how moving the portion of OTTI due to credit risk into the EBT calculation will not impact taxable income and hence the dividend.
Can you make a post which shows how this would work?
and yet more idiotic non-sense from people who think that just because CIM pays 90% of their income (by law) they cannot lose money.
Sure, you dividend is safe, but your capital isn't!
Any losses in CIM's portfolio may not be reflected in the dividend, but they will be reflected in the NAV / book value and price of the stock.
Take a look at CIM's price chart.. from $15 to $2.80.
Doesn't anyone look at the charts before investing in failing institutions like CIM??
I'm sorry that people invested in CIM at $15, but don't assume that everyone did. I didn't. I have a fairly low cost basis in CIM, having bought on dips and sold on rises, collected some dividends, reinvested them at good prices and if I had some dry powder yesterday I would have bought when others were selling.
Of course your principal investment is always at risk. Some investors are more risk tolerant than others and their tolerance for a decline in principal may be different than others. It all depends on why they have invested in an dividend income stock like CIM.
Don't belittle others.